GBPUSD initial try above 1.5000 rejected

Market optimists still have the upper hand early in US session with focus on lower weekly US jobless claims data.

MAJOR HEADLINES – PREVIOUS SESSION

• US Apr. NAHB Housing Market Index rose to 14 vs. 10 expected and 9 in March

• New Zealand Mar. Business PMI out at 40.7 vs. 38.9 in Feb.

• UK Mar. BRC Retail Sales rose 0.6% year on year, but same store sales fell -1.2% year-on-year

• China Mar. GDP rose 6.1% year-on-year vs. 6.2% expected

• China Mar. Purchasing Price Index out at -8.9% YoY vs. -7.1% expected

• China Mar. Retail Sales out at +14.7% year-on-year vs. +14.6% expected and +11.6% in Feb.

• China Mar. Industrial Production rose 8.3% year-on-year vs. +6.3% expected and 11.0% in Feb.

• Switzerland Mar. Producer and Import Prices fell -0.5% MoM vs. -0.2% expected

• EuroZone Mar. CPI out at 0.4% MoM as expected

• EuroZone Feb. Industrial Production out at -2.3% MoM vs. -2.5% expected.

• Canada Feb. Manufacturing Shipments out at 2.2% vs. 2.0% expected

• US Mar. Housing Starts out at 510k vs. 540k expected and 572k in Feb.

• US Mar. Building Permits out at 513k vs. 549k expected and 564k in Feb.

• US Weekly Initial Jobless Claims out at 610k vs. 660k expected

THEMES TO WATCH – UPCOMING SESSION

• US Apr. Philadelphia Fed (1400)

• US Fed's Lockhart to speak (1700)

• New Zealand Q1 Consumer Prices (2245)

• US Fed's Yellen to speak (0000)

• Australia Q1 Import/Export Price Index (0130)

• US Fed's Fisher to speak in Beijing (0200)

• New Zealand Mar. Non-resident Bond holdings (0300)

• EuroZone ECB's Trichet to speak in Japan (0300)

• Japan Mar. Consumer Confidence (0500)

• Japan Mar. Nationwide Department Store Sales (0530)

Market Comment:

ECB members continue to send mixed signals on upcoming policy shifts. The ECB's Weber was out yesterday again speaking out against a cut below 1.00%, though he did follow up on the idea that the ECB would announce significant new non-traditional monetary policy measures aimed at reviving credit markets. Meanwhile, other ECB members seem to hint that the would like to see rates cut more deeply. If the theory goes that Central Bank activism is good for the economy, then this is certainly a Euro negative development. We don't subscribe to this idea for the long run, but certainly in the short run, the enhanced liquidity from more CB activism helps more than hurts, so EUR seems to be suffering on the idea that a hamstrung ECB will allow Euro fundamentals to deteriorate more sharply in the shorter term.

AUD paying too much attention to commodities rally and could be vulnerable to the next, inevitable swoon in risk appetite. Stories abound about China's appetite for stocking up on commodiies in anticipation for future demand. (see Evan-Pritchard's latest over at the Telegraph on the fascinating idea of a commodity-based currency) Australian interest rates comparisons suggest that the AUD is getting overvalued and if the base metal rally fades here with the next, larger correction in equity markets and risk appetite in general, AUD could be in for a very sharp correction, perhaps back to the 0.6800 area to begin with. Note that the AUDUSD rally seems to be shying away from its 200-day moving average, so that level is certainly one to watch to see if this rally sequence is topping (see more in chart below). And speaking of commodity currencies, the loonie seems also to have caught a massive bid on the commodity theme, but would also likely pivot on the circumstances we note above.

The Chinese growth numbers overnight (Q1 growth estimated at 6.1%) are difficult to believe. How does an economy geared so heavily towards industrial production and exports actually manage to grow in this environment? Yes, the government's focus there has shifted to massive infusions of stimulus spending and easing credit to compensate for the cliff-dive in exports, but we have a hard time believing in the sustainability of this data considering reports of tens of millions of jobless migrant workers and swarms of factory closings due to China's massive production overcapacity. There is no way an economy of that size can shift gears in 2 quarters. Eventually, the Chinese regime may be able to re-engineer its economy and shift growth over to a better balance between consumption and production, but this will take time, certainly more than a few months. Loosening the purse strings of consumers and making a more dynamic economy will likely require massive property rights reforms and a comprehensive new social safety net policies.

The US CPI data for March grabbed headlines yesterday, with the first year-on-year decline in headline numbers in more than half a century. But this development was inevitable considering the massive fall in energy prices that occurred starting in August of last year and the next couple of month's numbers are likely to register even stronger negative readings. As we noted the last time around, the year-on-year comparisons become most interesting once we get into the late fall, when year on year energy price comparison are relatively stable. Also worth noting again is that core year-on-year comparisons are still at +1.8%, above the 1.1% low from the 2003 multi-decade low. Convincing arguments have been made that we ought to add about 200 bps to post-Clinton inflation calculations anyway. All in all, in other words, real price deflation is an open debate outside of asset markets.

Risk appetite received another boost with a weekly jobless claims number out of the US that is the lowest since January. It shows us how flaky market sentiment has become when the market rallies on "only" 610,000 new jobless claims in the short space of a week is considered good news. We hasten to note that last week was a short Easter Week and that the 4-week moving average is far more important than a single data point. From the reaction pattern of late, it still appears that the USD needs a move in risk aversion to generate significant further gain

Chart: AUDUSD

AUDUSD has paused significantly here just below its 200-day moving average. The broader AUD index has become one with the move higher in base metals, as we noted above. With AUD approaching these key levels, we wonder if the market may soon take a second look at whether AUD is getting overpriced vs. other important indicators, especially interest rates. Also, the frothy risk appetite evident in world equity markets could be in imminent danger of an unwind. This would all add up to a very steep consolidation lower for the Aussie over the coming one to two weeks.